Early rate cuts unlikely, says Kganyago

SPEAKING OUT: Impeccable Lesetja Kganyago is interviewed at The Herald

The end of the interest-rate increase cycle in South Africa does not mean that the SA Reserve Bank (SARB) will start reducing borrowing costs, governor Lesetja Kganyago said yesterday.

“We could be coming to the end of our hiking cycle,” he said at the World Economic Forum on Africa gathering in Durban.

“Coming to the end of the hiking cycle does not mean that a cutting cycle will commence.”

The SARB’s monetary policy committee (MPC) has kept its benchmark rate unchanged at 7% since March last year, even as inflation exceeded its 3% to 6% target band for most of last year.

Forward-rate agreements, used to speculate on borrowing costs, show investors pricing in 20 basis points of rate cuts by the end of the year, even as the rand weakened after President Jacob Zuma fired Pravin Gordhan as finance minister in March.

“A lot of market commentators are running ahead of themselves with forecasting rate cuts,” Kganyago said. While the rand weakened as much as 11% against the dollar following Zuma’s dismissal of Gordhan in a cabinet reshuffle, the currency has regained some ground to extend its advance this year to 2%.

The MPC’s assumption for the exchange rate at its most recent meeting on March 30 was weaker than the present rate, Kganyago said.

Inflation, which slowed to 6.1% in March, would fall to within the target band in this quarter and would remain there until at least 2019, the committee said then.

“The inflation outlook is not going to change as a result of the gyrations that we saw on the exchange rate,” Kganyago said.

“There are factors which are putting downward pressure on inflation. Food prices continue to surprise and in part due to the fact that we had a very good rainfall.”

S&P Global and Fitch cut South Africa’s credit assessment to junk after Gordhan’s axing and Moody’s put its reading, which is at the second-lowest investment-grade level, on review for a downgrade.

While the SARB said on Tuesday it expected a high risk of more downgrades, Kganyago said he could not speculate on what Moody’s would decide.

“Moody’s has spelled out what factors needed to be addressed. We don’t believe those issues are insurmountable.”

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